Trade dispute dampens SMIC's debut

Shanghai-based chip foundry raises $1.7 billion

SteveGelsi

Editor's note: This story has been updated to correct the name of Tercica Inc.'s lead underwriter.

NEW YORK (CBS.MW) -- Shares of China's Semiconductor Manufacturing International dipped below their offering price Wednesday in initial trading on the New York Stock Exchange.

The silicon-chip manufacturer
SMI, -3.38%
known as SMIC, closed at $15.52, down $1.98, or 11 percent below its $17.50 offering price. Volume of about 31 million shares made the IPO one of the most heavily traded issues on the Big Board.

Dampening the debut was a complaint lodged by U.S. officials against China under World Trade Organization rules over tax breaks enjoyed by chipmakers based on the mainland.

"The WTO news worried some people," said Kathy Smith of Renaissance Capital, which owns the stock.

IPO analyst Francis Gaskins agreed that the trade flap is affecting shares of SMIC, despite the IPO's kudos on Wall Street as a good bet on China growth.

Also, the Hong Kong stock market has been trading down in recent days, which dampens enthusiasm for overseas issues, he said. SMIC's Hong Kong debut is scheduled for Thursday. See Asia Markets.

As with many foreign IPOs, SMIC priced its IPO days before kicking off actual trading. Traditional IPOs begin trading the morning after a pricing.

"If the issue doesn't trade up right away, investors all want out -- they're not willing to hold it," Gaskins said.

Still, at $1.7 billion in U.S. proceeds, SMIC qualifies as the largest tech offering thus far in 2004, and as the third-largest IPO overall in terms of dollar proceeds.

The Shanghai, China-based firm offered 97.9 million American depositary shares at $17.50, the top of its $15.50-to-$17.50 range with underwriter CS First Boston.

Press conference snafu on capital spending

In an unusual detail in the SMIC's IPO filings, the company disclosed that an executive made an inaccurate claim about the company's cash supply for capital spending at a press conference on March 7. The item reinforced earlier disclosures that the company could issue more stock in the future, or increase its debt load - neither of which would help a firm's stock price.

"One of our officers made an inaccurate statement to the effect that the estimated net proceeds to use from the global offering, cash from operating activities, borrowings under our existing banking facilities and cash on our balance sheet . . . should be sufficient to meet our planned capital expenditures through 2005," SMIC said in its IPO filing. "We currently do not believe that such sources will be sufficient to meet our capital requirements."

SMIC said it believes it'll pursue additional external financing, such as an additional stock sale, or borrowing, for its capital expenditures and working capital needs through 2005.

Fans on Wall Street

Overall, SMIC has drawn a big following among fund managers such as Thornburg Investment Management, which praised its four-year-old track record and quick revenue growth. See full story.

Analyst David Menlow of IPO Financial said the chip foundry outclasses other recent China IPOs because of its "quality and strength."

Founded in 2000 by 20-year Texas Instruments veteran Richard Chang, SMIC has already rung up a profit as it's moved to quickly expand its manufacturing operation.

"SMIC has a first-mover advantage in China, where the market share of global chip consumption is expected to expand to 24 percent from 14 percent," noted Renaissance Capital in its IPO of the Week column. See full story.

"Because of its first-mover advantage and smaller size, SMIC is expected to grow three to four times more quickly than its peers," Renaissance Capital said. "Yet, its proposed valuation represents a discount to its peers on a price-to-book basis, an often-used valuation metric in the industry."

The company was funded with $1.7 billion from the Shanghai municipality, Peking University and some international investment pools.

The Shanghai municipality will be SMIC's largest shareholder after the offering, holding a 10 percent stake.

Motorola
MSI, -0.29%
which also has a purchase agreement with SMIC, secured a stake in the company when SMIC purchased its Tianjin facility in January.

Tercica prices below range

Meanwhile, Tercica Inc.
TRCA
closed at $9, flat with its reduced price, on volume of 2.8 million. The company priced its IPO below its lowered $11-to-$13 range.

The South San Francisco, Calif.-based biotech firm, which is developing treatments for disorders of the endocrine system, originally eyed a $14-to-$16 price range. The shares changed hands lately at $9.04.

Tercica raised $49.5 million by offering 5.5 million shares with underwriter Lehman Brothers.

It's the second biotech IPO of the week to debut at a reduced price, following on Tuesday's debut of Xcyte Therapies
XCYT
which closed at $7.31, down nearly 9 percent from its offering price.

Viasystems is back

In a sign of a revival in the tech sector, St. Louis-based circuit board maker Viasystems filed to go public again after Chapter 11 bankruptcy proceedings, in a deal to raise up to $316 million.

The company plans to trade its shares on Nasdaq under "VIAS." Goldman Sachs has been tapped as lead underwriter.

Viasystems, which formerly traded on the NYSE under the symbol "VG," raised $924 million in its March 24, 2000, IPO but later filed for bankruptcy as the telecom sector slumped in 2001 and 2002.

A plan of reorganization was consummated on Jan. 31, 2003, with private-equity firm Hicks Muse Tate & Furst as its largest shareholder.

In 2003, Viasystems rang up net income of $190 million and revenue of $751 million, as compared to a net loss of $259 million and revenue of $864 million in 2002.

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